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How high inflation rate affects on business and economy

Updated on July 1, 2017

In simple language, inflation means rising prices and it shows the increase in cost of living. In economics, inflation is explained as rise in the general level of prices of goods and services in an economy over a period of time. With the rise in price levels a unit of currency will buy fewer goods and services. As a result, the purchasing power of money will be reduced with inflation. In other words the real value of money will be lost day by day along with inflation. Inflation is measured by the Rate of Inflation or Inflation Rate which is the percentage change in a general price index calculated as an annualized figure.

A low inflation rate is beneficial to a country and zero or negative inflation is considered as bad. Also, a high inflation is harmful to an economy and it affects an economy in many ways.

  • High inflation distorts consumer behavior. Because of the fear of price increases, people tend to purchase their requirements in advance as much as possible. This can destabilize markets creating unnecessary shortages.
  • High inflation redistributes the income of people. The fixed income earners and those lacking bargaining power will become relatively worse off as their purchasing power falls.
  • Trade unions may demand for higher wages at times of high inflation. If the claims are accepted by the employers, it may give rise to a wage-price spiral which may aggravate the inflation problem.
  • During a high inflation period, wide fluctuations in the inflation rate make it difficult for business organizations to predict the future and accurately calculate prices and returns from investments. Therefore, it can undermine business confidence.
  • When inflation in a country is more than that in a competitive country, the exports from former country will be less attractive compared to the other country. This means there will be less sales for that country‚Äôs goods both at home and abroad and that will create a larger trade deficit. At the same time, high inflation in a country weakens its competitive position in the international market.

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  • Effects of high inflation

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Comments

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    • profile image

      gilly 

      3 years ago

      nice job well done

    • profile image

      Ezah Ruth 

      3 years ago

      good explanation ,good work done

    • profile image

      muchohonyi 

      3 years ago

      how does a high rate of inflation affects industries

    • profile image

      meldon 

      4 years ago

      thank you very much may god bless you :)

    • profile image

      Cameo 

      5 years ago

      I would like to find springs for twin beds which could be used as bunk beds or sertapae twin beds. They might have been sold by Sears? There are 2 wooden slats to hold the springs in place, which sit in wooden pieces on the bedrails. If I can find springs for these beds, I would like to pass them along to my granddaughter for her 2 daughters.The springs were not coil but elongated triangles fastened together with twists of metal.Do you know of a source for such springs which would not cost an arm and a leg to buy?Many thanks for your help,Aileen

    • profile image

      Howard Schneider 

      5 years ago from Parsippany, New Jersey

      Excellent and complete analysis of this critical business factor, LasanthaW. Thumbs up to you.

    • profile image

      91398 

      5 years ago

      Thank you I will be plagiarizing your work!

    • profile image

      Wole 

      6 years ago

      Thank you for helping us

    • profile image

      zinhle 

      6 years ago

      what are the effect of high and low inflation rate on borrowing of money (consumer)?

    • profile image

      Jessica 

      6 years ago

      Thanks but I think you can do better

    • profile image

      lindani Ngcobo 

      6 years ago

      I would like to thank you hub sofisticated help i found. but i just have one quation, what effect does the inflation have on investment spending both in households and firms?

    • profile image

      hammed 

      6 years ago

      that is good to let those people know how to solve they are problem

    • profile image

      Sandya 

      6 years ago

      Thanks, I badly needed this explanation.

    • Mr Tindle profile image

      Mr Tindle 

      8 years ago

      LasanthaW,

      Good Hub. One thing I would add to your points. Inflation is ultimately a "Stealth Tax". It's a hidden form of taxation. When Governments want to spend money they don't have they often resort to the ease of cheap borrowing or even just printing money. Though it seems like free or cheap money at the time, there is a cost found in the inflation that a country's people will have to suffer through eventually.

    • LasanthaW profile imageAUTHOR

      Lasantha Wijesekera 

      8 years ago from Sri Lanka

      Cheeky Girl, thanks for your comments.

    • Cheeky Girl profile image

      Cassandra Mantis 

      8 years ago from UK and Nerujenia

      High inflation is what we do not want. This is a great hub, points well made!

    • LasanthaW profile imageAUTHOR

      Lasantha Wijesekera 

      8 years ago from Sri Lanka

      Thanks for your comments.

    • profile image

      kims3003 

      8 years ago

      Great hub - nicely done. A+!

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